"The implication is that full employment must be restored as a primary goal of macroeconomic policy..."
from sharedprosperity.org
from sharedprosperity.org
June 22, 2007 | EPI Briefing Paper #191
EPI Agenda for Shared Prosperity
Challenging the Wall Street paradigm
by Thomas Palley
Economic Policy and the Challenge of Shared Prosperity
Over the last 30 years the American economy has exhibited a systematic disconnection between wages and productivity growth. This disconnection means that ordinary Americans are not properly sharing in the economy’s growth, thus contributing to rising income inequality.
Rising inequality and the failure of wages to rise with productivity has triggered a fundamental debate among Democrats. One position argues that the underlying structure of the economy is sound, but workers must be offered a “helping hand” in the form of enlightened social policy, in the form of income supports, tax credits, educational assistance, and wage insurance. Policy would thereby ameliorate the effects of the disconnection between wages and productivity growth.
A second position is that the underlying structure of the economy is flawed, and policy needs to address the flaws. From this perspective, it is not enough to address “symptoms:” policy must address underlying “causes.” Enlightened social policy is always welcome, but it is not adequate to the scale of the problem and therefore cannot produce the desired outcome—an economy in which productive work is appropriately rewarded and provides the means for participating in the American dream.
There is a further analytical twist, which is that economic policy has itself contributed to the disconnection of wages and productivity growth. That calls for changing the existing policy paradigm. There are many dimensions of policy that must change, including labor market policy (Kochan and Shulman 2007) and globalization policy (Faux 2007). This briefing paper examines needed changes in macroeconomic policy—monetary policy, exchange rate policy, and fiscal policy.
The argument is that existing macroeconomic policy has paid inadequate attention to delivering full employment for the U.S. economy. In doing so, current policy has contributed to undermining the link between wages and productivity growth because full employment is an essential condition for workers to be able to bargain for a fair share of productivity. Moreover, as documented by Bernstein and Baker (2003), the benefits of full employment go beyond higher wages and more jobs to include reduced poverty and crime rates. The implication is that full employment must be restored as a primary goal of macroeconomic policy, and this briefing paper describes policies that can bring about that outcome.
The Erosion of Shared Prosperity
Over the last 30 years the U.S. economy has experienced a sea change in performance defined by the emergence of a disconnection between wages and productivity growth. The disconnection is captured in Figure A, which shows growth of productivity and hourly compensation for production and non-supervisory workers (who constitute over 80% of wage and salary employment). From 1959 to 1979 compensation moved with productivity. Since 1979 productivity has kept growing but hourly compensation has essentially flat-lined.
The flipside of the wage/productivity-growth disconnection is increasing income inequality. Figure B shows how family incomes at the top (95th percentile) and the bottom (20th percentile) of the scale grew together between 1947 and 1973. Indeed, family incomes at the bottom of the distribution actually grew fractionally faster than those at the top. Since 1973, however, this situation has been transformed: instead of growing together, the nation has grown apart, with the productivity growth dividend accumulating almost entirely to those in the top 20%—and especially the top one percent—of the family income distribution.
These developments occurred in two stages. Stage one involved widening of wage inequality, exemplified by the CEO-pay explosion. Figure C shows that between 1979 and 2005 CEO pay went from being 38 times average worker pay to 262 times. Stage two has occurred post-2000 and has been marked by a jump in the profit share of national income.
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